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Profits must increase with risks
By TRIO A BRUNHART
An analysis of the national energy
plan conducted at Texas A&M Uni
versity has found that oil company
profits must increase along with any
increases in investment risks.
Dr. Peter S. Rose, a professor of
finance at Texas A&M and author of
the study, said the more uncertainty
in industry profits, the more risks to
stockholders. Consequently, inves
tors are only willing to take on
added risks if the oil companies pay
higher interest rates. Therefore the
companies must earn a greater re
turn on their product to afford the
higher interest rates.
The study states that the costs of
energy exploration, development,
and transportation are rising and
since petroleum resources are avail
able only in more remote locations,
the risk of investment is greater.
Rose said remote locations are such
places as offshore drilling areas and
Alaska’s north slope.
“The risks include not only
technological and economic factors,
but also political forces, Rose said.
The government makes the “rules of
the game he said, and changes in
these rules can he a risk to invest
ment. For example, there could he
changes in permissible prices, or in
promoting competition.
The study also found that capital
needs for the petroleum industry
have increased greatly since the
mid-I960’s. An estimate by the
Energy Economics Division and
Chase Manhattan Bank places “total
capital requirements for oil and gas
production and exploration in the
free world at 1.3 trillion between
1976 and 1985.”
Oil companies in the United
States rely in part on borrowed
funds to meet their capital needs
and have done so since their begin
nings, Rose said. These funds come
from commercial banks in the forms
of short- and medium-term loans, or
from selling bonds.
Petroleum firms enjoyed the
greatest profitability during the
early 1950’s for several reasons, said
Rose. One reason is that costs were
below any legal price ceilings,
which makes it easier to make a
profit. Another reason is that during
this time there was a relative quiet
in the economy and interest rates
were low. A third reason is that de
mand grew faster than the cost of
production, which boosted reve
nues.
During the oil embargo of 1973-
1974, profits of oil companies were
greater because there was a rise in
the value of inventories of oil, said
Rose. The Arabs raised the price and
the oil which was stored in tanks in
creased in value, he explained.
With the increased value of oil, pe
troleum firms found their net worth
rising.
The study suggests solutions for
the financial situation in the oil in
dustry. “One possibility is to insti
tute more flexible pricing policies
for both oil and natural gas in order
to allow industry revenues to keep
pace with rising costs,” Rose said.
A sudden lifting of price controls
would not be advisable, he said. In
stead, these controls should be a
phased out as quickly as possible.
Another suggestion is “to encour
age greater diversification into new
product lines and geographic re
gions. By spreading out into many
markets, oil firms would be able to
hold down their cost of capital and
reduce their financial and operating
risks.
Rose, who once worked for the
Federal Reserve Bank of Dallas as a
financial economist, researched the
121-page study for four months.
campus activities
Monday
Student “Y”, applications available until
Feb. 17, 216 MSC
Women’s Leadership Workshop, 6:30
to 8 p.m., 145 MSC
Killeen Area Hometown Club, 7:30
p.m., 350 MSC
266 G. Rollie White
Tuesday
Student Teachers, for those going
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p.m., 108 HECC
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old Engineering Building
Lambda Sigma, 7 p.m., 108 Harrington
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p.m., 201 VMS
Nautical Archeology, 7:30 p.m., 140A
MSC
TAMU Collegiate FFA, 7:30 p.m., 209
Harrington
Recreation & Parks Club, 7:30 p.m.,
Goodwin Hall, basement
Phi Delta Gamma, Dr. Nanetter
Bruckner, 8 p.m., 205 MSC
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